Reinsurance Special Purpose Vehicles Regulations, 2013

Suppliment tal-Gazzetta tal-Gvern ta’ Malta, Nru. 19,188, 27 ta’ Diċembru, B 2013

L.N. 452 of 2013

INSURANCE BUSINESS ACT

(CAP. 403)

Reinsurance Special Purpose Vehicles Regulations, 2013

IN exercise of the powers conferred by article 64 of the

Insurance Business Act, the Minister for Finance, after consultation

with the Malta Financial Services Authority, has made the following

regulations:-

The title of these regulations is the Reinsurance Special Citation.

Purpose Vehicles Regulations, 2013.

(1)

In these regulations, unless the context otherwise Interpretation.

requires -

"the Act" means the Insurance Business Act;

"aggregate maximum risk exposure" means the sum of the

maximum payments, including expenses, that the authorised

reinsurance special purpose vehicle may incur, excluding expenses

that meet the following criteria

(a)

the authorised reinsurance special purpose vehicle

has the right to require the ceding undertaking to pay the

expense;

(b) the authorised reinsurance special purpose vehicle is

not required to pay the expense unless and until an amount

equal to the expense has been received from the ceding

undertaking;

(c)

the ceding undertaking does not include the expense

as an amount recoverable from the authorised reinsurance

special purpose vehicle;

"authorised reinsurance special purpose vehicle" means a

reinsurance special purpose vehicle, which is authorised in

accordance with these regulations;

"ceding undertaking" means an insurance or reinsurance

undertaking, which has received an official authorisation in

accordance with Article 6 of Council Directive 73/239/EEC of 24

July 1973 on the coordination of laws, regulations and administrative

provisions relating to the taking-up and pursuit of the business of

direct insurance other than life assurance, Article 4 of Directive 2002/

83/EC of the European Parliament and of the Council of 5th

November 2002 concerning life assurance or Article 3 of Directive

2005/68/EC of the European Parliament and of the Council of 16th

November 2005 on reinsurance, that has transferred risk to a

reinsurance special purpose vehicle, and includes an insurance or

reinsurance undertaking authorised in a third country;

"competent authority" means the Malta Financial Services

Authority established by the Malta Financial Services Authority Act;

"Financial Services Tribunal" means the Tribunal established

under article 21 of the Malta Financial Services Authority Act, and

the term "Tribunal" shall be construed accordingly;

"group" shall mean a group of undertakings, which consists of a

parent undertaking, its subsidiaries and the entities in which the

parent undertaking or its subsidiaries hold a participation, as may be

determined by an insurance rule;

"insurance manager" means a person enrolled as such under

article 13 of the Insurance Intermediaries Act;

"insurance rule" has the same meaning as is assigned to it by

article 2 of the Act for the purpose of carrying into effect the

provisions of these regulations;

"providers of debt or financing" means professional clients as

defined in Annex II of Directive 2004/39/EC of the European

Parliament and of the Council of 21 April 2004 on markets in

financial instruments (the MiFID Directive);

"reinsurance special purpose vehicle" means an undertaking,

other than an existing insurance undertaking or reinsurance

undertaking, which assumes risks from a ceding undertaking and

which fully funds its exposure to such risks through the proceeds of a

debt issuance or any other financing mechanism where the repayment

right of the providers of such debt or financing mechanism are

subordinated to the reinsurance obligations of such a vehicle;

"third country" means a country that is not a Member State or

EEA State;

"‘triggering event", in relation to a reinsurance special purpose

vehicle contract, means an event or condition, specified in the

contract, that would oblige the reinsurance special purpose vehicle to

make one or more payments to the ceding undertaking under the

contract.

(2) Words and expressions used in these regulations which are

also used in the Act, but which are not defined herein, shall in these

regulations have the same meaning as in the Act.

(1) An undertaking may carry on business as a Authorisation of

reinsurance special purpose vehicle in or from Malta only in a special

accordance with an authorisation granted by the competent authority vehicle.

in terms of these regulations.

(2) An authorised reinsurance special purpose vehicle shall

only assume risks from a single ceding undertaking or from ceding

undertakings belonging to the same group, and shall not engage in

activities other than those permitted under these regulations.

(3) Where a reinsurance special purpose vehicle intends to

enter into contractual arrangements relating to the transfer of risk,

with a ceding undertaking, established in a country outside Malta, the

competent authority shall consult the overseas regulatory authority

concerned, before it takes a decision on authorisation.

(4) The authorisation of a reinsurance special purpose vehicle

shall state the uses for which the special purpose vehicle is

authorised, and any terms and conditions relating to that use.

(5) The competent authority shall decide on an application for

an authorisation within six months of the date of its receipt; and if it

refuses to issue the authorisation it shall inform the applicant in

writing of the reasons for the refusal.

(6) Any person who is aggrieved by a decision of the

competent authority to refuse to issue an authorisation under this

regulation may appeal against the decision to the Financial Services

Tribunal.

A reinsurance special purpose vehicle shall only be Eligibility

eligible for authorisation in terms of these regulations if all the criteria

authorisation.

following conditions are fulfilled

(a) the undertaking is a limited liability company

formed or constituted in Malta;

(b) its objects are restricted to operating as a reinsurance

special purpose vehicle;

(c)

it assumes risks from a ceding undertaking through

reinsurance contracts, or assumes insurance risks through

similar arrangements;

(d) the contractual arrangements relating to the transfer

of risk from a ceding undertaking to the reinsurance special

purpose vehicle, and the investment in assets by the reinsurance

special purpose vehicle, satisfy the conditions of regulation 6;

(e)

the persons who effectively direct or manage the

reinsurance special purpose vehicle satisfy the requirements of

regulation 7(2)

Provided that the reinsurance special purpose

vehicle may, subject to the approval of the competent authority,

appoint an insurance manager to manage its business;

(f)

the undertaking has disclosed the identity of the

shareholders or members having a qualifying shareholding in

the reinsurance special purpose vehicle and such persons satisfy

the fit and proper criteria as determined by an insurance rule

issued under the Act on the prudential assessment of

acquisitions and increase of holdings in authorised companies;

(g) it has an effective system of governance and meets

the conditions of regulation 8;

(h) it is capable of meeting the requirements of

regulation 9; and

(i)

it satisfies the requirements of regulations 10 and 11.

(1) The competent authority shall not issue an

authorisation in terms of these regulations unless it is satisfied that -

(a)

an application for authorisation is made in writing

by the reinsurance special purpose vehicle, in the manner

determined by an insurance rule;

(b) an application for authorisation under paragraph (a)

is accompanied by -

(i) a scheme of operations which shall include

the information required by an insurance rule;

(ii) a copy of the proposed contract between the

reinsurance special purpose vehicle and the ceding

undertaking, which shall include any triggering event and

the maximum aggregate exposure limits of the reinsurance

special purpose vehicle;

(iii) a copy of the memorandum and articles of

association of the reinsurance special purpose vehicle;

(iv) details of any trustee holding the assets or

shares of the reinsurance special purpose vehicle;

(v) details of any administrator or other

functionary of a foundation holding shares in the

reinsurance special purpose vehicle;

(vi) details of the identity of any qualifying

shareholders, and of the directors, controllers and all

persons who will effectively direct or manage the

reinsurance special purpose vehicle, including all

information needed to assess whether these persons are fit

and proper as determined by an insurance rule issued under

the Act on the criteria of fitness and properness.

(2) The authorisation of a reinsurance special purpose vehicle

is only valid for the use for which it was established, and any reuse or

change of use is subject to prior approval by the competent authority.

(3) Where an authorised reinsurance special purpose vehicle

assumes additional or more than one risk under more than one risk

transfer arrangement from a single ceding undertaking or from ceding

undertakings belonging to the same group, it shall seek separate

approval from the competent authority for every arrangement.

(4) In order to receive approval for any such arrangements as

referred to in sub-regulation (3), the authorised reinsurance special

purpose vehicle shall demonstrate to the competent authority

(a)

that it can maintain adequate bankruptcy remoteness

protection for each arrangement at all times;

(b) that it can ensure that the link between the funding

leg for a specific arrangement is sufficiently matched to the

related risks assumed, and that such links are clearly defined

and effectively legally ring-fenced so as to avoid potential

contagion from one arrangement to another; and

(c)

how it intends to maintain compliance with the

fully-funded requirement under regulation 10 at the aggregate

maximum risk exposure level and the individual risk exposure

of each separate arrangement assumed in addition to the overall

requirement at a total level.

(5) Where the authorised reinsurance special purpose vehicle

is not able to demonstrate compliance with sub-regulation (4), the

competent authority shall not approve the proposed new

arrangements.

(6) The competent authority shall have the power to require

any undertaking to provide such information as it may deem

necessary for the purposes of determining an application for

authorisation or approval.

(1) An authorised reinsurance special purpose vehicle

shall ensure that the mandatory conditions found in sub-regulations

(2) to (4) are included in all contractual arrangements relating to the

transfer of risk.

(2) The contractual arrangements relating to the transfer of

risk from a ceding undertaking to an authorised reinsurance special

purpose vehicle shall ensure that the authorised reinsurance special

purpose vehicle is at all times fully funded, as set out in regulation 10.

(3) The contractual arrangements relating to the transfer of

risk from a ceding undertaking to an authorised reinsurance special

purpose vehicle and from the authorised reinsurance special purpose

vehicle to the providers of debt or financing shall ensure that -

(a)

the transfer of risk is effective in all circumstances;

(b) the extent of risk transfer is clearly defined and

incontrovertible,

and the transfer of risk shall not be deemed to be effective in all

circumstances where there are connected transactions which could

undermine the effective transfer of risk.

(4) The contractual arrangements relating to the transfer of

risk from a ceding undertaking to an authorised reinsurance special

purpose vehicle and from the authorised reinsurance special purpose

vehicle to the providers of debt or financing shall also ensure that

(a)

the claims of the providers of debt or financing

mechanisms are at all times subordinated to the reinsurance

obligations of the authorised reinsurance special purpose

vehicle to the ceding undertaking;

(b) no payments are made to the providers of debt or

financing, if following those payments the authorised

reinsurance special purpose vehicle would no longer be fully

funded;

(c)

the providers of debt or financing to the authorised

reinsurance special purpose vehicle have no rights of recourse

to the assets of the ceding undertaking;

(d) the providers of debt or financing to the authorised

reinsurance special purpose vehicle have no rights to apply for

the winding-up of the authorised reinsurance special purpose

vehicle.

(5) The mandatory conditions specified in this regulation shall

apply and shall be given effect notwithstanding any provisions of any

other law.

(1) An authorised reinsurance special purpose vehicle Fit and proper

shall have in place an effective system of governance which provides requirements.

for the sound and prudent management of the business.

(2) All persons who effectively direct or manage an authorised

reinsurance special purpose vehicle shall, at all times, fulfil the

following requirements

(a)

their professional qualifications, knowledge and

experience are adequate to enable the sound and prudent

management of the activities of the reinsurance special purpose

vehicle; and

(b)

they are of good repute and integrity.

(3) An authorised reinsurance special purpose vehicle shall

notify the competent authority if any of the persons referred to in sub-

regulation (2) have ceased to be fit and proper because they no longer

fulfil the requirements referred to in the said sub-regulation.

(4) An authorised reinsurance special purpose vehicle shall

notify the competent authority of any changes in the identity of any

qualifying shareholders and of the persons who effectively direct or

manage it and shall provide the competent authority with all

information needed to assess whether the persons proposed are fit and

proper.

(1) An authorised reinsurance special purpose vehicle System of

shall have a system of governance that is appropriate to the nature, governance

requirements.

scale and complexity of the risks that it assumes and the uses for

which it is authorised in accordance with regulation 3, including

(a)

sound administrative and accounting procedures,

including the maintenance of adequate and orderly records of

the activities and transactions undertaken by the authorised

reinsurance special purpose vehicle, adequate internal control

mechanisms and an effective risk management system;

(b) written policies in relation to at least risk

management, internal control, administrative and accounting

procedures and, where relevant, outsourcing;

(c)

internal controls to ensure that the mandatory

contract conditions in regulation 6, the solvency requirements in

regulation 10 and the prudent person principles in regulation 11

are fulfilled on an on-going basis;

(d) an effective risk-management system comprising

processes and reporting procedures necessary to identify,

measure, monitor, manage and report, on an on-going basis the

risk to which the authorised reinsurance special purpose vehicle

could be exposed.

(2) The written policies referred to in sub-regulation (1)(b)

shall include policies relating to the areas referred to hereunder to the

extent that these are relevant taking into account the uses of the

authorised reinsurance special purposes vehicle

(a)

underwriting and reserving;

(b)

asset-liability management;

(c)

investment, in particular derivatives and similar

commitments;

(d)

liquidity and concentration risk management;

(e)

operational risk management;

(f)

reinsurance and other risk-mitigation techniques.

(3) An authorised reinsurance special purpose vehicle shall

ensure that the policies referred to in sub-regulation (1)(b) are

implemented effectively.

(1) The competent authority may request such

information from the authorised reinsurance special purpose vehicle

as is necessary in order to supervise such vehicle.

(2) An authorised reinsurance special purpose vehicle shall

report to the competent authority, within such period as may be

determined by the competent authority, the following information

(a)

the value of its assets, distinguished by material

class and a description of the basis, methods and assumptions

used for their valuation;

(b) its aggregate maximum risk exposure of, and a

description of the basis, methods and assumptions used for the

determination of the aggregate maximum risk exposure;

(c)

conflicts of interest between any of the authorised

reinsurance special purpose vehicle, the ceding undertaking and

the providers of debt or financing;

(d) significant transactions entered into by the

authorised reinsurance special purpose vehicle during the last

reporting period.

(3) An authorised reinsurance special purpose vehicle shall

inform the competent authority of any material changes that could

affect the compliance by such vehicles with the requirements set out

in regulations 3 to 8 and 10.

(1) An authorised reinsurance special purpose vehicle Solvency

shall be fully funded at all times and shall satisfy the following requirements.

conditions in order to be considered fully funded

(a)

its assets are valued in accordance with generally

accepted accounting principles and practice;

(b) it has at all times assets the value of which is equal

to or exceeds the aggregate maximum risk exposure, and it is

able to pay the amounts it is liable for as they fall due;

(c)

the proceeds of the debt issuance or other financing

mechanism are fully paid-up.

(2) The assessment by the competent authority as to whether

an authorised reinsurance special purpose vehicle is fully funded shall

be based on whether the conditions in sub-regulation (1)(b) and (c)

have been satisfied, taking into account, where appropriate

(a)

the liquidity risk of the authorised reinsurance

special purpose vehicle;

(b) the quantifiable risks of the authorised reinsurance

special purpose vehicle;

(c)

the arrangements for holding assets in the authorised

reinsurance special purpose vehicle.

(3) An authorised reinsurance special purpose vehicle shall

demonstrate to the competent authority in the report referred to in

regulation 9 and on request by the competent authority that it satisfies

the requirements in sub-regulation (1), having regard to the factors in

sub-regulation (2).

(4) Payments relating to existing insurance and reinsurance

contracts, that are expected to be received in the future by the

authorised reinsurance special purpose vehicle from the ceding

undertaking, may be included in the assets of the authorised

reinsurance special purpose vehicle, provided that the following

conditions are met

(a)

its future liabilities to the providers of debt or

financing only arise subject to the receipt of the payments from

the ceding undertaking;

(b) there is no scenario under which the own funds of

the ceding undertaking would be negatively affected by the

payment not being received by the authorised reinsurance

special purpose vehicle;

(c)

it continues to meet the conditions set out in sub-

regulation (1) in the event that the payments from the ceding

undertaking are not received;

(d) the payments do not relate to expenses that are

excluded from the aggregate maximum risk exposure.

(5) For the purposes of sub-regulation (4), "existing insurance

or reinsurance contract" means an insurance or reinsurance contract

which has resulted in recognising insurance or reinsurance

obligations.

(6) The authorised reinsurance special purpose vehicle shall

immediately inform the competent authority

(a)

where it observes that the fully funded requirement

is no longer complied with; or

(b) where there is a risk of non-compliance in the

following three months.

(7) In the cases referred to in sub-regulation (6)(a) and (b), the

authorised reinsurance special purpose vehicle concerned shall

submit within one month of the observation of non-compliance or risk

of non-compliance, for approval by the competent authority, a

realistic financial scheme to restore compliance with the fully funded

requirement within such period as may be determined by the

competent authority.

An authorised reinsurance special purpose vehicle shall Application of

invest its assets in accordance with the prudent person principle as prudent

principle.

follows

(a) with respect to the whole portfolio of assets, it shall

only invest in assets and instruments whose risk it can properly

identify, measure, monitor, manage, control and report;

(b) assets shall be invested in such a manner as to

ensure the security, quality, liquidity and profitability of the

portfolio as a whole. In addition the localisation of those assets

shall be such as to ensure their availability;

(c)

all assets shall be invested in a manner appropriate

to the nature and duration of its liabilities. All assets shall be

invested in the best interest of the ceding undertaking;

(d) the use of derivative instruments shall be possible

insofar as they contribute to a reduction of risks or facilitate

efficient portfolio management;

(e)

investments and assets which are not admitted to

trading on a regulated financial market shall be kept to prudent

levels;

(f)

assets shall be properly diversified in such a way as

to avoid excessive reliance on any particular asset, issuer or

group of undertakings, or geographical area and excessive

accumulation of risk in the portfolio as a whole; and

(g) investments in assets issued by the same issuer, or

by issuers belonging to the same group, shall not expose it to

excessive risk concentration.

The funding requirement for a specific risk transfer Funding

arrangement shall not be subsequently re-allocated to satisfy the requirement

risk transfer

funding requirements of any other existing or new arrangement arrangements.

assumed by the authorised reinsurance special purpose vehicle,

unless

(a)

the authorised reinsurance special vehicle has

received prior authorisation from the competent authority for

any changes to its intended use, where differing from that for

which it is authorised; and

(b) the authorised reinsurance special purpose vehicle

can adequately demonstrate that there is full legal certainty that

the obligations of the first arrangement have been met, and no

subsequent claims could be made against the funding in

connection to the original arrangement.

(1) Without prejudice to article 26 of the Act, the

competent authority may withdraw an authorisation granted to an

authorised reinsurance special purpose vehicle in the following cases

(a)

when it does not make use of the authorisation

within twelve months, expressly denounces its authorisation or

ceases to pursue business for more than six months, unless the

terms and conditions of the authorisation make provision for an

authorisation to lapse in such cases;

(b) when it no longer fulfils the original conditions of

its authorisation; or

(c)

when it fails in its obligations under these

regulations or any insurance rules issued thereunder, or any

applicable provisions of the Act, or any regulations or insurance

rules issued thereunder, to which it is subject.

(2) With specific reference to sub-regulation (1)(c), the

competent authority shall withdraw an authorisation granted to an

authorised reinsurance special purpose vehicle in the event that it

does not comply with the fully-funded requirement and the competent

authority considers that the financial scheme submitted is inadequate,

or, it fails to comply with the approved scheme within three months

from the observation of non-compliance with the fully funded

requirement.

(3) Any decision to withdraw an authorisation shall state the

full reasons and shall be communicated to the authorised reinsurance

special purpose vehicle concerned. Any overseas regulatory

authorities concerned shall also be notified of the decision without

delay.

(4) For the purposes of sub-regulation (3), the provisions of

article 27 of the Act shall apply mutatis mutandis.

(5) Any person who is aggrieved by a decision of the

competent authority to withdraw an authorisation under this

regulation may appeal against the decision to the Financial Services

Tribunal.

Any person acting in contravention of, or failing to comply Offences and

with or otherwise observe any of the provisions of these regulations, penalties.

shall be liable to a penalty of an amount as determined by article

64(2) of the Act.

(1) The provisions of the Act, other than those Application of

provisions listed in sub-regulation (2), shall apply to an authorised the Act.

reinsurance special purpose vehicle, in the same manner and to the

same extent as they apply to a company authorised under the Act, as

if a reference in the Act to a "company" were a reference to an

"authorised reinsurance special purpose vehicle".

(2) For the purposes of sub-regulation (1)

(a)

Part III of the Act shall not apply;

(b)

Part IV of the Act shall not apply;

(c)

Part V of the Act shall apply as follows

(i) article 20 of the Act shall not apply and the

following provision shall apply in substitution thereof

"Every authorised reinsurance special

purpose vehicle shall, not later than four months

from the date of its financial year, or at any other

time as may exceptionally be authorised in writing

by the competent authority, forward to the

competent authority a copy of its audited financial

statements drawn up in accordance with the

Companies Act.";

(ii) articles 22 and 23 of the Act shall not apply;

(iii) article 24 of the Act shall only apply in so far

as the obligations of auditors are concerned;

(d)

article 25 of Part VI of the Act shall not apply;

(e)

article 32 of Part VII of the Act shall not apply;

(f)

Part VIII of the Act shall not apply;

(g)

Part IX of the Act shall apply as follows

(i)

subarticle (1) of article 39 of the Act shall

apply as if an authorised reinsurance special purpose

vehicle were required to give, not later than six months

before the date on which it intends to cease its activities,

notice in writing of its intention to the competent authority,

and the authorised reinsurance special purpose vehicle

were required to comply with any directive issued to it by

the competent authority; and subarticles (2) and (3)

thereof, shall not apply;

(ii) article 41 shall apply as if an authorised

reinsurance special purpose vehicle were required only to

dissolve and consequently wind up under and in

accordance with the Companies Act;

(iii) article 42 of the Act shall not apply;

(h)

articles 44 to 48B of Part X of the Act shall not

apply;

(i)

Part XI of the Act shall not apply; and

(j)

articles 60, 62, 63,and 69 of Part XII of the Act shall

not apply.

(1) Without prejudice to sub-regulation (3), articles 5,

5A, 6, 7, 13, 16, 17, 21, 24 and 25 of the Securitisation Act shall

apply to an authorised reinsurance special purpose vehicle.

(2) Subject to the provisions of this sub-regulation and of sub-

regulation (3), the following provisions of the Securitisation Act shall

apply to an authorised reinsurance special purpose vehicle in the

manner hereunder

(a)

article 2 shall apply subject to the following

(i) the definition of "originator or assignor" shall

not apply and any reference to the term "originator" or

"assignor" as used in the Securitisation Act shall be

deemed to be a reference to the term "ceding undertaking"

as defined in these regulations;

(ii) the definition of "risks" shall not apply and

any reference to "risks" shall be construed in accordance

with paragraph (c) of regulation 4;

(iii) the definition of "securitisation" shall not

apply and any reference to "securitisation" shall be

construed in accordance with the definition of "reinsurance

special purpose vehicle" in regulation 2;

(iv) the definition of "securitisation asset" shall

not apply;

(v) the definition of "securitisation vehicle" shall

not apply and any reference to the term "securitisation

vehicle" as used in the Securitisation Act shall be deemed

to be a reference to the term "reinsurance special purpose

vehicle" as defined in these regulations;

(b)

article 8 shall apply subject to the following

(i) subarticle (1) thereof shall apply on condition

that the any delegation to a third party is subject to

approved approval by the competent authority;

(ii) subarticle 2 thereof shall not apply;

(c)

article 10 shall apply subject to the following

Paragraph (c) of sub-article (1) thereof shall apply

without prejudice to any legitimate claim of the ceding

undertaking under the applicable contractual agreements;

(d) articles 11 and 12 shall apply only in so far as any

notice that may be required to be issued in accordance with sub-

article (5) of article 13 is concerned;

(e)

article 14 shall apply subject to the following

Paragraph (c) of sub-article (2) thereof shall only

apply in so far as it provides for the non-application of

articles 1980 to 1984 of the Civil Code;

(f)

article 22 shall apply subject to the following

(i) sub-paragraph (ii) of paragraph (a) of sub-

article (1) thereof shall apply without prejudice to

paragraph (d) of sub-regulation 4 of regulation 6;

(ii) paragraph (b) of subarticle (1) thereof shall

not apply;

(iii) subarticle (2) thereof shall not apply.

(3) Notwithstanding the foregoing, where any applicable

provisions of the Securitisation Act, or any rules or regulations made

thereunder, are inconsistent with the provisions of these regulations,

these regulations shall prevail, and the provisions of the said Act,

rules or regulations shall, to the extent of the inconsistency, not apply

to reinsurance special purpose vehicles.

(1) The competent authority may share information and

cooperate with any overseas regulatory authorities concerned, in

relation to the supervision of authorised reinsurance special purpose

vehicles.

(2) The competent authority may also exchange information

on planned supervisory actions where it deems these actions to have a

material and potentially adverse effect on the supervision of a ceding

undertaking for which an overseas regulatory authority is responsible.

(1) The competent authority may issue insurance rules

for the purposes of these regulations.

(2) Such insurance rules may contain such incidental,

supplementary and consequential provisions as appear to the

competent authority to be expedient for the purposes of these

regulations.

€0.72